Mortgage reform back to Square 1

HUD pulls proposals after 20 months of wrangling

CHICAGO (CBS.MW) -- Reform of the mortgage process in the United States, an increasingly complex transaction that generates mountains of virtually indecipherable paperwork, is late in coming.

And it may get later still.

A plan to update the main law regulating mortgage applications and closings, which has been under review for 20 months, was scrapped Monday by the U.S. Dept. of Housing and Urban Development. The agency is charged with interpreting and enforcing that law.

HUD withdrew the proposed changes because of the many "significant" questions raised, and says it will re-examine the overhaul.

"The administration is strongly committed to efforts to simplify, improve, and lower costs associated with obtaining home mortgages," acting HUD Secretary Alphonso Jackson wrote in a letter to the Office of Management and Budget.

However, "due to the significant number of questions raised" about the draft rules, HUD had decided to re-examine the proposal, Jackson said.

Law has not kept up

Nobody thinks the Real Estate Settlement and Procedures Act (RESPA) works well anymore. The law, which regulates the residential mortgage process, was enacted in 1974 -- in mortgage years the equivalent of the Middle Ages.

Former HUD Secretary Mel Martinez kicked off the reforms in July 2002. He acknowledged then that the journey would be an uphill one. He said many people tried to dissuade him from change, saying it would be too difficult and controversial to amend the law.

Now Martinez is gone, having left the Bush administration for a run at public office in Florida, and with him any chance for a quick, consumer-friendly overhaul.

The problems Martinez wanted to address remain.

"The mortgage finance process and the costs of closing are major impediments to homeownership. Every day, Americans enter into mortgage loans -- the largest financial obligation most families will undertake -- without the clear and useful information they receive with most any other major purchase," Martinez told Congress when he unveiled his reform plans.

Savings on the line

Consumers have a big stake in any kind of mortgage reform. Martinez estimated that a streamlined mortgage process could reduce costs on the average housing transaction by about $700, a collective $7 billion in annual savings to homebuyers and sellers.

Lawmakers were initially receptive. But it wasn't long before real estate and mortgage-industry groups began pecking away at the proposals.

The National Association of Realtors, Mortgage Bankers Association and American Land Title Association were among those to find fault with some or all of the proposals. The objectors embraced the notion that the housing-finance system was working well, and there was no need to upset the apple cart.

"Since I began my tenure as acting secretary, I have heard from a number of members of Congress, on a bipartisan basis, who voiced concerns about not receiving the benefit of a full briefing of the RESPA rule before HUD sent it to OMB," Jackson acknowledged in his letter.

"In addition, I have heard from key members of a number of consumer and industry groups who have expressed concerns that echo those of Congress."

Jackson said he now plans to revise the Martinez proposal, "if necessary," and to repropose the reforms. He'll request additional comments after having "an opportunity to brief members of Congress and to meet with affected consumer and industry groups. After the rule has had a complete vetting, I will send it back to OMB for review."

OMB Director John Graham responded quickly, saying that while the agency's review of the original reform proposals had not been completed, it had turned up areas of concern.

"We believe the RESPA reforms are promising, but agree that the rule would benefit from additional consideration," Graham wrote.

Among the items OMB said HUD should reconsider:

The update of the Good Faith Estimate forms, which must be delivered to mortgage applicants, "could produce unintended consequences." The sticking point was how consumers might react to the disclosure of "yield spread premiums" -- essentially the markup of wholesale mortgage rates by intermediaries such as brokers.

"In light of the extensive comments received, HUD should expand its analysis of how various (loan) packaging alternatives facilitate comparative shopping and consumer savings. This analysis should also evaluate the ability of various entities to offer packages," Graham wrote.

Further study of whether the federal statutes need to preempt state laws that also regulate the mortgage industry.

A deeper look at how RESPA changes might spur small-business and job creation.

Real estate trade groups were also quick to respond, applauding the decision to pull the proposed rules and praising legislators who pushed to have the rules rewritten.

"More and more decisions affecting millions of homeowners are being made at the regulatory level today. It's important that Congress continue to actively oversee the regulators," said Walt McDonald, president of the National Association of Realtors, in a statement.

The Mortgage Bankers Association said it remained supportive of the goals of mortgage reform, "to simplify the mortgage transaction process while reducing costs for consumers."

"HUD's announcement to withdraw the RESPA rule is a win for consumers and the housing industry, which has been a pillar of the U.S. economy," said Kurt Pfotenhauer, MBA's senior vice president of government affairs.

"MBA and its members want to thank the hundreds of members of Congress who raised appropriate questions to HUD about the unintended consequences of issuing a final rule that would significantly overhaul the way Americans buy homes."

It seems, though, that all the "unintended consequences" relate to business interests. The decision to take more time for study compromises the "intended consequence" of the whole exercise -- making the mortgage process more palatable, and cheaper, for consumers.

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